Insights 
VT 
The Euro is trading positively against the US Dollar as of Tuesday, following weaker US Consumer Confidence data. The EUR/USD pair stands around 1.1654, maintaining its gains for the fifth straight session. However, traders are cautious ahead of the Federal Reserve’s policy announcement.
US Consumer Confidence dropped to 94.6 in October, down from 95.6 in September. The Present Situation Index rose to 129.3, while the Expectations Index fell to 71.5. Inflation expectations for the coming year have increased to 5.9%. These figures have eased the US Dollar Index to trade around 98.70, down from a high of 98.95.
Focus On The Fed
The focus is now on the Fed’s interest rate decision, with high anticipation of a rate cut following one in September. If the rate cut occurs, the focus will then shift to the Fed’s statement and Chair Jerome Powell’s comments. A hawkish tone could suggest less likelihood of further cuts, whereas dovish tones might imply more easing is possible.
Meanwhile, the European Central Bank is expected to maintain its rates at 2.00% on Thursday, which might support the Euro further. This is amidst a lack of recent US labor market data due to the government shutdown and lower inflation figures.
We are seeing the US Dollar weaken as traders react to the soft consumer confidence number of 94.6. This figure is a significant drop from the more robust levels above 120 we saw before the inflationary period of 2022-2024, adding to concerns about a slowing economy. The market has now almost fully priced in the expected quarter-point rate cut from the Federal Reserve.
With the rate cut itself widely anticipated, the real trade is in the volatility surrounding the Fed’s forward guidance. One-week implied volatility for EUR/USD options has climbed notably, showing the market’s expectation of a sharp move following the announcement. This makes strategies like buying straddles attractive for those who believe a big price swing is coming, regardless of the direction.
Potential Impact Of Powell’s Comments
If Chairman Powell signals this is just a recalibration and not the start of a deep cutting cycle, we could see a “hawkish cut” scenario that boosts the Dollar. In this case, short-term put options on the EUR/USD could pay off as the pair would likely drop below 1.1600. Conversely, any hint of more cuts to come would be very dovish, likely sending EUR/USD surging toward the 1.1800 level.
Beyond Wednesday’s announcement, we must watch the growing policy divergence with the European Central Bank. While the ECB is expected to hold its rate at 2.00%, the Fed’s move to 4.00% marks a narrowing of the interest rate differential that has favored the dollar for so long. This trend is a key factor behind the Euro’s recent five-day rally.
This Fed pivot comes after a long fight to control the inflation that peaked above 9% back in 2022. The fact that year-ahead inflation expectations are still stubbornly high at 5.9% shows how persistent pricing pressures have been. This complicated backdrop means the Fed will be cautious about signaling too much easing, creating a very uncertain environment perfect for volatility traders.
